Business 2 November 2018

Ed Drake

Hong Kong rolls out regulatory standards for crypto exchanges, funds

The Hong Kong Securities and Futures Commission (SFC) published a statement detailing the new regulatory standards set to come into effect for cryptocurrency investors and businesses. Concluding a process that began with draft proposals in October, the statement stipulated for the first time the precise terms fund distributors and asset managers will be expected to adhere to.

The proposals were drafted as a response to perceived market threats from the inherent leverage of investing in crypto through funds, as well as in response to the body of unlicensed crypto trading platforms doing business out of Hong Kong.

Acknowledging that crypto hasn’t yet posed a threat to financial security, the SFC described how the new standards, and future standards, would shape the future of the state’s cryptocurrency sector.

According to the regulator, “While virtual assets have not posed a material risk to financial stability, there is a broad consensus among securities regulators that they pose significant investor protection risks. The regulatory response to these risks varies in different jurisdictions, depending on the regulatory remit, the scale of the activities and their impact on investor interests and whether virtual assets are deemed financial products suitable for regulation.”

Lawmakers in different jurisdictions have taken dramatically different positions on cryptocurrency regulation, as regulators struggle to retrofit this emerging sector around existing finance and securities laws.

As the SFC explains in its statement, the current position in Hong Kong means many investors still end up in the hands of unregulated platforms, with none of the legal protections afforded by the SFC.

“Under existing regulatory remits in Hong Kong, markets for virtual assets may not be subject to the oversight of the SFC if the virtual assets involved fall outside the legal definition of ‘securities’ or ‘futures contracts’ (or equivalent financial instruments),” the commission noted, adding, “Therefore, investors who trade in virtual assets through unregulated trading platforms or invest in virtual asset portfolios which are managed by unregulated portfolio managers do not enjoy the protections afforded under the Securities and Futures Ordinance (SFO).”

The new laws will broaden the definitions of “futures contracts” and “securities,” in an attempt to bring a bigger share of virtual assets within the remit of the SFC.

This increased scope of supervision could ultimately lead to more investors and exchange operators requiring licenses, as well as providing a more defined regulatory structure for the sector.

Note: Tokens on the Bitcoin Core (SegWit) chain are referenced as BTC coins; tokens on the Bitcoin Cash ABC chain are referenced as BCH, BCH-ABC or BAB coins.

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